AARP Smart Guide to Buying a Vacation Home

LONG-TERM INVESTMENT

13. Use an online calculator

To get a sense of a vacation property’s financial viability, enter the figures — such as purchase price, loan terms, operating expenses and rental income — into a web tool and let it spit out an analysis, Bourdon says. Some examples are Investment Property Calculator (DinkyTown.net), Rental Property Calculator (Calculator.net) and Real Estate Investment Return Calculator (CalcXML.com).

14. How much can you charge for rent?

According to Dealcheck, certain general principles apply. The 50-percent rule advises that operating expenses, not including mortgage payments, typically should make up about half of rental income. Meanwhile, the 1-percent rule advises that a rental property’s gross monthly income should be at least 1 percent of its purchase price (after repairs). Some investors aim for 2 percent or 3 percent — the higher, the better. For example, if you buy a vacation home for $200,000 and spend $50,000 on repairs and upgrades, the monthly rental income should be at least $2,500. Monthly operating expenses — including insurance, utilities, garbage collection, property management, cleaning services, security and homeowners’ association or condo fees — should not exceed $1,250 per month in that scenario.

15. Do online research

Look at rents for comparable properties on Zillow, Realtor.com and Redfin, Chastain advises. They also provide info on occupancy rates. Additionally, short-term rental sites like Airbnb and VRBO can provide insights into local demand and rental trends. Be aware that short-term rental rates will vary by season. “Consider seasonality for peak season, off-season, special events and holiday pricing,” Bourdon says. A real estate agent can also help provide this information.

16. Be aware of the risks

Properties in vacation destinations can be particularly susceptible to economic downturns. “Vacation properties are the first things people try to get rid of in a down market, and they decline in value,” says Greg Titus, who owns a vacation home in Maine. This can affect how long you own the property — you may need to hold on to it longer than planned to wait for the market to bounce back — or it might mean you’ll need to tap into your cash reserves to cover decreased rental income for a period of time. “Set aside money to cover unexpected, prolonged vacancies,” Lofley says.

17. Build rental relationships

Search for high-quality renters, and work to keep them. “I live in Florida, where it’s common for a couple to ‘winter’ at the same rental property every year,” Lofley says. “This works great — the people who come every year are more likely to keep coming during a downturn, and it removes the stress of having to find new renters in unsteady markets. The renters like it, too, because it removes the need to search out new accommodations every year.”

18. Check the tax benefits

Your vacation property may qualify for deductions for mortgage interest, property taxes, maintenance and depreciation when rented, says Pam Ladd, a senior manager of personal financial planning at the Association of International Certified Professional Accountants. Consult with a tax professional to understand the tax rules and regulations to maximize these benefits.

19. Take advantage of the tax-free loophole

If you rent your property for 14 days or fewer in a year, you don’t need to report the income on your tax return, says Sinnett. This can come in handy as extra income if your vacation property is in a community that hosts a big annual event, such as a golf tournament. However, that also means you can’t deduct rental expenses.

EXPENSES

20. Understand expenses

Beyond your mortgage, what sort of expenses should you expect to incur with your vacation home? Schindler notes that maintenance, property management fees, HOA/condo fees, utilities, insurance and property taxes can quickly add up. He estimates that annual maintenance costs can range from 1 percent to 4 percent of the property’s value. Bourdon notes that insurance is increasingly expensive and possibly difficult to obtain in certain popular vacation areas, such as Florida and California. Also, consider the expense of replacing furniture and appliances, which may wear out faster through use if you rent out the property, Chastain says.

21. Cut furnishing costs

If your vacation property is strictly for personal use, furnish it as you would your primary home. But if you will rent it at all, Chastain advises against buying top-of-the-line furniture. Purchase sensible and durable stain-resistant furnishings, focusing on mattresses, bedding, sofas, seating, dining tables, appliances and kitchen essentials. You want to have furniture that is attractive but can withstand turnover.

MAINTENANCE

22. Go for simple

“Vacation homes that people find most satisfying are those used frequently and are easy to maintain, such as condos,” Bourdon says. You don’t want to spend your vacation time working on maintenance and upkeep. Condos eliminate many of the time-consuming exterior-maintenance responsibilities that come with standalone properties, such as mowing lawns, clearing snow or maintaining the building’s exterior during a limited vacation time. “The condo’s HOA typically manages and maintains the building’s exterior, common area and major structural components such as the roof and foundation,” Bourdon says. “This shared responsibility reduces the risk for condo owners because they don’t bear the full cost of major repairs.”

PROPERTY MANAGEMENT

23. Outsource the rental work

“Many people do not realize how renting out a vacation home can become another job,” says Caro. “It seems simple, but before you know it, you are running your own hotel.” Managing a rental property requires attention to maintenance, landscaping and tenant concerns. A property manager will handle such matters. Property managers can also take on the responsibility of guest bookings, tenant communication and financial management. Hiring a manager, says Chastain, is ideal “when you have no interest in being a hands-on landlord.” But this comes with a price. Expect to pay 8 to 12 percent of rental income to a property manager.

24. Consider calamities

One of the key advantages of hiring a property manager, even if you don’t rent the property, is having the ability to prevent costly issues before they escalate. What happens if a pipe bursts on the property when you’re not there? “Consider what would happen if you had a flood left unattended that you were not aware of,” Caro says. “This could lead to more serious water damage and mold.” Also, consider that if your property is not well maintained, it could become a target for burglars who realize it is unoccupied. Experts say non-rental property management services cater to second homeowners who want their vacation homes maintained while they’re away. These services include regular inspections, maintenance, cleaning, landscaping and security monitoring.

25. Be secure

Install a security system to protect your property from break-ins when you’re not there. You also should have someone check on the property periodically, whether it’s a friend, neighbor or someone you hire. When renting, owners must carry liability protection; renters may not always be trustworthy and can carry their own security risks. However, you may be limited in where you place security cameras if you rent the unit, for privacy reasons. Or you may need to disclose where they are located to renters. Be sure to check local laws.

INSURANCE

26. Extra coverage may be needed

If your vacation home is only for personal use, standard homeowners insurance may be enough, says Featherngill. But if you plan to rent the home, you may need landlord insurance to cover tenant-related risks. Landlord insurance provides coverage for property damage caused by tenants, lost rental income due to covered events, and liability protection if a tenant or guest is injured on the property. While some short-term rental platforms like Airbnb offer insurance, their policies have limitations and may not fully cover all potential losses. Property owners should consider their own rental insurance.

27. An unoccupied property carries risks

A home that sits vacant for long periods is more vulnerable to break-ins, unnoticed maintenance issues and weather damage. Consider vacant home insurance to protect against vandalism, weather damage and other risks.

28. Renters also present risk

You may need extra liability coverage, or to form an LLC, to shield yourself from legal risks, Featherngill says.

CO-OWNERSHIP

29. Going in with friends or family?

Some people will split the cost of a vacation home and share its use. That can be a good financial move, but Chastain says a “co-ownership agreement” is essential. A real estate attorney should help you draft that agreement. To prevent conflicts, clear guidelines are crucial. “Create a system for allocating time at the property — for example, a rotating schedule and priority rules,” Chastain says. Titus agrees: “Get everything in writing — who’s responsible for what; who can use it when.” Featherngill recommends creating a comprehensive shared property agreement that addresses usage, decision-making authority and funding of expenses.

30. Develop an exit strategy

This includes how a part-owner can sell their interest, including offering first-refusal rights to other co-owners, and under what conditions the property will be sold altogether, such as by unanimous decision or majority vote.

PROPERTY SALE

31. Consider the tax implications

When you sell a vacation home, you’ll generally owe capital gains tax based on how much the property has appreciated and how long you’ve owned it, Sinnett says. If the property generated rental income, it may be classified as an investment property, Sinnett explains, which subjects it to different tax treatments.

32. Convert it to your primary residence

This move would likely exempt the property from capital gains tax, but you must meet the residency time requirement: living in the home for at least two out of the last five years before the sale, Caro says. A common strategy, Sinnett says, is buying a rental property, later making it a primary residence, and then selling it after meeting the required residency period.

PASSING DOWN A PROPERTY

33. Discuss it with your heirs

“Parents and grandparents assume the next generations want the property,” Chastain says. “The discussion needs to happen with the next generation. ‘Do you want the property? Can you afford to keep the property?’ You would be surprised to learn that these questions are not asked enough.” Bourdon adds a wise perspective: “Give your heirs the gift of freedom by letting them know you intend the property to serve them, not the other way around.” This approach keeps heirs from feeling obligated to keep a property they may not want or be able to maintain.

34. Choose the right ownership structure

This is essential for minimizing tax liabilities and ensuring a smooth transition, Chastain says. According to Sinnett, options include gifting the property, placing it in a trust or designating it in a will. Each method has distinct tax and legal implications. For instance, Sinnett notes that gifting the property during your lifetime may trigger gift taxes, while passing it through your estate could subject it to estate taxes. Consulting an estate attorney is essential.